Target misses the mark with Q2 earnings

Cautious consumers and costs associated with the ramp-up of its Canadian expansion will likely lead to weaker results for the remainder of the year, Target said Wednesday, as it reported a drop in second-quarter earnings.

The Minneapolis-based discount retailer, which entered the Canadian market for the first time in March and had 68 stores in the country by the end of the second quarter, is offering a muted full-year outlook.

"As we monitor the economy and consumer sentiment, we continue to see a mix of signals in which emerging optimism is balanced with continuing challenges," Target chief executive and chairman Gregg Steinhafel said in a conference call with analysts.

In Canada, he said, the company is only five months into its market launch and is adjusting and refining operations as it learns from its experience and prepares to open another 56 stores by the end of the year.

Target now estimates its third-quarter adjusted earnings per share will be between 80 and 90 cents US and net income will be between 55 cents and 65 cents.

The adjusted EPS excludes 22 cents related to Canadian operations and three cents related to a non-operating asset in the third quarter.

The company also said its 2013 full-year adjusted earnings will be near the low end of its previous guidance of $4.70 to $4.90 per share.

Shares in the company were trading at $65.61 in the New York Stock Exchange Wednesday, down $2.34 or more than three per cent.

Although Target's international move has been anticipated since it agreed to move into many of the stores formerly occupied by Zellers, the Canadian launch has apparently missed the mark for many Canadian shoppers.

It began with rumblings when Target was criticized during its "soft openings" for running out of some products. Some customers also complained about pricing they considered too high.

A survey in August by Forum Research, a market research firm, found only 27 per cent of those polled indicated they were "very satisfied" with their experience at Target.

That was below Target's score in Forum's April survey, when 32 per cent of those polled indicated they were "very satisfied" with their experience at the discount retailer.

Steinhafel acknowledged there's been a disconnect with consumers when it comes to pricing, but insisted prices were competitive and "right where they need to be when compared to competition in local markets."

"We know there is a gap in guest awareness of how low our prices really are," he said.

"We are deploying multiple tactics to help our guests better understand the great value and convenience we provide in these categories."

Tony Fisher, president for Target Canada, said initial traffic was good in Canada, with higher than expected sales in the home and apparel categories, but the company must now focus on driving sales in categories such as health care, food, beauty and paper, where traffic is slower.

Target is also working to adjust inventory and in-store staffing to match the pace of sales in each of its locations.

"We continue to learn a lot. There are things we're learning about our guests about what they expect and I'd say where that's most evident is just how that guest shops across our entire store," Fisher said in a phone interview.

But, he added, "we don't have to make transformational changes in our business model, it really is tweaks."

He also said Target was committed to its Canadian expansion, noting the company's own internal surveys show customer satisfaction has improved every month since the launch.

"This is one of the most significant things that we've ever invested in as an organization," he said.

"If we think things need to accelerate from a results standpoint, we're actually going to over-invest in this Canada strategy as an organization because we have that much confidence that it's the right strategy."

Target earned $611 million, or 95 cents per share, in the quarter ended Aug. 3, compared with $704 million, or $1.06 per share, a year earlier.

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